Counterfeiting and piracy

Fakes, facts and figures

Linda Haie-Fayle and Wolfgang Hübner

Directorate for Science, Technology and Industry

Fake goods are not cheap. In fact, they exact a heavy cost on industry, governments and the general public. There is a strong case for public action across OECD countries against counterfeiting. The question is how to make progress? Want to buy an expensive Swiss watch? Not everyone can afford a real one–a Patek Philippe timepiece can be worth many thousands of dollars, and some very exclusive makes, such as a Vacheron Constantin, can cost over a million!

Still, you may have found a convincing lookalike in some market on your travels: the genuine item is made of several hundred parts and would have taken many thousands of hours of costly research and development to make, but this imitation seems to work well, and it looks smart. You shrug your shoulders and buy it, because “anyway, counterfeiting is a harmless activity!” But what if the airplane you were about to board had been repaired with counterfeit airplane parts: How smart would you feel then?

Modern counterfeiters will copy or recycle just about anything as long as there is a profit to be made, and they are becoming increasingly adept at doing so. The last laugh is on the consumer. Counterfeit or pirated products may seem temptingly cheap, but they are neither a small nor a harmless business. Did you know that when you buy fake designer glasses or a pirated CD you could be financing organised crime or even terrorism, and that for every euro you spend the counterfeiter is making huge profits? Indeed, the counterfeit and pirate goods business can be more lucrative than selling illegal drugs, and with a lower risk of being caught.

Crime is one good reason to take counterfeiting seriously as a public policy issue, but there are others. Fake goods pose a threat to public health and safety. They destroy businesses through loss of profits and consumer trust and, ultimately, brand value. They impact on employment when jobs shift from legitimate businesses–the “rights” holders–to infringing parties. This impacts on the economy, and on the welfare of employees who often work under poor conditions in clandestine, illegal activities. Counterfeiting stunts development and undermines public institutions. Moreover, it damages the very process of innovation that is so vital to economic growth and welfare today. In short, counterfeiting undermines global economic co-operation and development, which is why OECD governments must fight it.

Counterfeiting is probably as old as markets themselves–legend has it that ancient Greek wine was once counterfeited by the Romans! But today the extent and complexity of the problem have increased with globalisation and new communications technology.

While the economic, social and development losses from counterfeiting and piracy are probably enormous, more and better data would help establish just how enormous they are in terms of lost profits, tax revenues, eroded welfare of employees, working conditions and so on. International trade provides some indication of how big the counterfeit and piracy business is–as much as $200 billion in 2005, according to a forthcoming OECD report. But this figure does not include the counterfeit and pirated goods produced and sold within domestic markets, nor indeed the flow of pirated digital products being distributed via the Internet. This means that total counterfeiting and piracy worldwide could well be several hundred billion dollars more.

Counterfeit and pirated products are being produced and consumed in virtually all countries, with Asia emerging as the single largest source. Counterfeiting is a bane in some transition countries too, not least Russia. However, customs data also record interceptions of counterfeit goods in nearly every OECD member country!

Consumers who knowingly buy counterfeit goods might think they are getting a bargain but the lower quality of infringing products finally shows through when the watch stops or the fake glasses break. However, consumers are often not aware if the goods they buy are counterfeit. One reason is the art of copying, packaging and labelling has become more sophisticated, making it difficult to tell fake and genuine products apart. And far from being sold on shady street corners, counterfeit goods have started to find their way into regular distribution systems, and on to supermarket shelves right next to genuine goods. They slip through the system, bypassing rigorous testing procedures and safety standards, and present serious health and safety risks when sub-standard batteries for toys leak or explode, or fake baby formula causes illness or death.

Automotive components from chassis parts to air bag mechanisms, tyres and brake pads have also been counterfeited. So have drugs to fight cancer, HIV/AIDS, and cardiovascular disease. These counterfeit products are unapproved and potentially dangerous as the formula may be wrong or they may contain toxic substances. They are manufactured on the cheap in the most dismal and unsanitary conditions and can expose patients to grave risks.

Apart from the public danger, these activities also have a deeper economic effect, beyond crowded out markets and squeezed profits: counterfeiting actually dulls incentives to innovate or invest. From watch masters to software engineers and pharmaceutical researchers, intellectual capital is violated and thousands of hours of R&D wasted. Counterfeiting and piracy involve a range of illicit activities that infringe intellectual property rights (IPR) over trademarks, copyrights, patents, design rights, and so on. The counterfeiters knowingly manufacture the fake goods. Indeed, much work at the OECD focuses on infringements as described in the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).

Clearly counterfeiters must be challenged, but how? One difficulty is that the counterfeiters usually keep a step ahead of the authorities. Their mafias, triads and other criminal groups are spread around the world, and commonly also deal in drugs, prostitution, human trafficking, money laundering, arms dealing and corruption. Their world is complex, involving skills and resources to make, move and distribute counterfeit and pirated goods through regulated markets.

The sheer volume of trade passing through ports, and the fact that counterfeiters constantly change tactics to avoid detection, frustrate efforts by stretched customs officers and other law enforcement agencies. Free-trade zones, with their relative lack of controls, have expanded rapidly in recent years, particularly, though not exclusively, in developing countries, and have become important channels for counterfeit/pirated products. There, counterfeiters conceal distribution channels by changing delivery companies or splitting shipments into smaller parts, which are then sent onwards using a web of delivery services and modes of transportation. And then of course there is the Internet, with its myriad auction sites, stand-alone e-commerce portals and e-mail solicitations all on a seamless global network. Indeed, any assault on counterfeiting would gain from a solid understanding of this “virtual” dimension.

Counterfeiting may always have been there, but renewed national and international efforts are clearly needed to fight it. There is no single remedy, and the OECD report lists several ways to develop information and analysis, strengthen legal and regulatory frameworks, enhance enforcement and deepen the evaluation of policies programmes and practices.

Counterfeiting is a global issue and governments, industry and consumers must take action together if they are to fight it. An obvious place to start is in legislation, by building on existing global initiatives, including the WTO’s TRIPS Agreement, which obliges government to enforce IPR and exact penalties. While many countries have adequate legal frameworks and regulations in place, enforcement is often a weak link, reflecting a lack of resources, or corruption. Inaccurate information can also hamper efforts: the authorities might know there is a problem, but need more coherent data and intelligence before they can act.

Tackling public attitudes can help, particularly in those markets where people deliberately seek out bargains. But awareness campaigns will be less effective in the very many cases where consumers believe they are buying a genuine item.

Closer government/industry co-operation would help squeeze the economic and legal space counterfeiters operate in. Many industry groups and associations have launched activities to assist in dealing with counterfeiting. A 2007 survey from one such group, the Business Action to Stop Counterfeiting and Piracy, found that industry efforts focus on developing technologies. This is important, but there are other areas for action, including building platforms for information exchange and finding ways to improve management so that dud components can be detected earlier on in supply chains.

Anti-counterfeiting measures cost money and resources. However, some government initiatives, such as seizing the profits of criminal activities and redirecting a proportion of them back into law enforcement, can ease the burden.

Comprehensive and comparable data are a vital base for all of these efforts, but how to build and report such a database? One promising framework which OECD countries could build on comes from the World Customs Organization. This looks at a range of elements, from date of interception and value of product, to routing and type of IPR infringement (patent, trademark, copyright, etc).

Can we counter the counterfeiters? A decade ago people believed writing off bribery costs from their taxes was acceptable: it no longer is. In this and many other areas of policy, the OECD has demonstrated how much can be achieved through sound information and open, determined co-operation. Our job is to help the global economy work better, and that means beating counterfeiting too.

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